India’s quest to become a cashless economy has been dealt a blow by a data breach that compromised as many as 3.2 million debit cards.

Prime Minister Narendra Modi urged Indians in a radio address in May to use cashless payments to discourage corruption and keep track of money. Convincing them may get harder after India’s national card payments network said that the data violation led to fraudulent transactions, mainly in China and the U.S.

The illegal withdrawals were limited to 641 customers of 19 banks, and the total amount involved was just 13 million rupees ($194,000), the National Payments Corp. of India said in a statement late Thursday. Yet the breach could reduce faith for cashless transactions in a country where Google Inc. estimates the digital payments industry will grow 10 times to $500 billion by 2020.

“Given that most Indians are in the villages and not tech savvy, there will be lot of apprehension regarding usage of digital money and cards after this breach,” said VVSSB Shankar, founder of i-lend, India’s first peer-to-peer lender. “This is a major setback for India’s fight against the cash economy. Banks will have to increase security measures and improve efforts to educate people to tide over this.”

Cash King

The South Asian nation has been aggressively pushing cashless payments, touting its so-called JAM mechanism that involves bank accounts for the poor, biometric identity cards and high mobile phone usage. About 98 percent of consumer payments are still made with cash, a report by PricewaterhouseCoopers Plc showed in 2015. That’s even with 697 million debit cards and 26 million credit cards in the country at the end of July, RBI data show.

Customers needn’t panic, A.P. Hota, managing director and chief executive officer of National Payments, said in the statement. Banks have advised customers to change their card security codes, and in cases where customers couldn’t be contacted, have blocked their cards and are issuing new ones, the payments system operator said.

“Rather than the actual impact of the breach it is the noise, confusion and fear of the unknown which is fueling the panic," Naveen Surya, chairman, Payment Council of India, said by phone. "Large part of the population is familiar with risks associated with hard cash while this is probably their first encounter with risks in digital money. We should put best security practices in place and also make more efforts to educate people.”

State Bank of India, the nation’s largest lender, said in a statement that it had blocked the cards of certain customers as a precautionary measure. ICICI Bank Ltd. said it had changed codes of cards used at affected ATMs.

Defense Lines

"Banks have taken steps to isolate affected cards and accounts,” said Tirthankar Patnaik, Mumbai-based chief strategist and head of research at Mizuho Bank Ltd. “Also, in India, the bank customer has two lines of defense: a mandatory shadow reversal in case the customer notifies the bank of a breach and deposit insurance in case of an irreversible loss."

The Reserve Bank of India August blamed an “unusually high and protracted” demand for notes and coins for slowing down the velocity of money, or the pace at which commercial lenders make fresh loans, which in turn become new deposits for the banking system and lead to further credit expansion.

Currency in circulation is more than nine times what it was 17 years ago. By comparison, China’s yuan pile has increased less than sixfold, even though the mainland’s economic expansion has outpaced India’s.